Advantage, China

By James McGregor
Sunday, July 31, 2005

BEIJING -- We're losing the intelligence war against China.

No, not the one with spy satellites, human operatives and electronic eavesdropping. I'm talking about intelligence : having an intelligent understanding of and intelligent discussions about China -- where it's heading, why it's bidding to buy major U.S. companies and whether we should worry. Above all, I'm talking about formulating and pursuing intelligent policies for dealing with China.

The Chinese government today understands America much better than our government understands China. Consequently, the Chinese government is much better at pulling our strings than we are at pulling theirs. China's top leaders, diplomats and bureaucrats have a clear framework from which they view the United States, and they are focused and unified in formulating and implementing their policies toward us.

In contrast, our government's viewpoint on China is unfocused, fractured and often uninformed. Is China still the Red Menace of the Cold War or a hot new competitor out to eat our economic lunch? Both views as well as a hodgepodge of other interpretations can be found in the halls of the White House, Congress and the Pentagon. Add to that confusion a vicious domestic political culture that brooks no compromise, and the chances of formulating a coherent China policy approach nil.

Playing the barbarians off against each other has been a core tenet of Chinese foreign policy since the imperial dynasty days when China's maps depicted a huge landmass labeled the "Middle Kingdom" surrounded by tiny islands labeled England, Germany, France, America, Russia and Africa. China was the center of the world and everyone else was a barbarian. That's why the Chinese are delighted by spectacles such as when rival members of a U.S. congressional delegation screamed at one another in front of their Chinese hosts in the Great Hall of the People. And what should they think of the time top Chinese officials laid out clear policy objectives to an American business audience and a U.S. cabinet member responded by saying "Jesus loves the Chinese people"?

Since the 1989 Tiananmen Square massacre, China policy has been a political football that American politicians kick back and forth to score points against one another. In the 1990s, it was a penalty-free game because the United States had the upper hand. China needed our capital, technology, know-how and insatiable consumer market to build its economy, as well as our blessing to join the World Trade Organization (WTO).

But those days are over. China's raging consumer market, its massive export machine, voracious appetite for global resources and more than $700 billion in foreign exchange reserves puts the ball in its court. It is difficult to overstate the transformation that has swept China in the past 15 years. To frame it in terms of comparable historical changes in the United States, China has been simultaneously experiencing the raw capitalism of the robber baron era of the late 1800s; the speculative financial mania of the 1920s; the rural-to-urban migration of the 1930s; the emergence of the first-car, first-home, first-fashionable-clothes, first-college-education, first-family-vacation middle-class consumer boom of the 1950s; and even aspects of social upheaval similar to the 1960s.

Today Chinese government officials and business executives admire, fear and pity the United States. They admire our entrepreneurial culture, free markets, legal system and ability to unemotionally discard what doesn't work while our best-in-the-world universities and enormous R&D capabilities create new products and services. China's economic reforms over the past 25 years have been aimed at creating a Chinese variation of the U.S. economic system and its ability to unleash entrepreneurial instincts and harness markets to build a world-beating economy.

China's fear stems from seeing our high-tech military machine in action. I will never forget standing in front of the Beijing train station during the first Gulf War, amid a sea of Chinese workers, thousands of whom had stopped their bicycles in the street to watch slack-jawed as huge outdoor TV screens displayed footage of American missiles screaming down Baghdad smokestacks. Just a few blocks away in the leadership compound of Zhongnanhai, Chinese officials imagined such destruction raining down on Beijing and realized that their strategy of defending China with swarms of peasant soldiers was as outdated as Maoist philosophy. They immediately embarked on a multi-decade plan to build a military as advanced as ours.

Chinese pity comes from their belief that we are a country in decline. More than a few Chinese friends have quoted to me the proverb fu bu guo san dai (wealth doesn't make it past three generations) as they wonder how we became so ill-disciplined, distracted and dissolute. The fury surrounding Monica-gate seemed an incomprehensible waste of time to a nation whose emperors were supplied with thousands of concubines. Chinese are equally astonished that Americans are allowing themselves to drown in debt and under-fund public schools while the media focus on fights over feeding tubes, displays of the Ten Commandments and how to eat as much as we can without getting fat.

China is all about unity, focus and leverage. Chinese officials and business executives are obsessed with a single question: What advantage do I have over you? No surprise then that Chinese officials are delighted to be funding ever larger portions of America's budget deficit. They know that if they sat out one U.S. Treasury auction, the U.S. stock markets would tumble. They yawn when Congress threatens to impose huge tariffs on Chinese imports, knowing that the resulting huge price increases at Wal-Mart, Best Buy and the Gap would cost some members of Congress their jobs. And while the Chinese do not relish sharing a border with the nutso North Koreans, they are happy to turn this bad situation to their advantage. The Bush administration desperately needs China's help in quelling the hermit kingdom's nuclear ambitions while we are bogged down in Iraq.

Still, China isn't even a fraction as powerful as it pretends to be. Beneath the bluster, it is a nation beset with internal problems. Pollution chokes its air and water. The growing gap between the haves and have-nots and rampant government corruption are triggering almost daily demonstrations. And China has no ideology other than enriching itself. The relentless commercial drive that has shaken China out of its imperial and socialist stupor has now become an end unto itself, leaving a population that is spiritually adrift. So far rapid economic growth, looser lifestyle strictures and straightforward political repression have held things together, but the Communist Party leadership knows that it needs a different formula for long-term success.

From a U.S. perspective, China's untempered commercialism suggests a nation out to milk us of everything it can. What is being lost in our vicious battles over China policy is that China and America have manageable differences and many complementary interests. With an intelligent and consistent China policy, the United States could help China and itself at the same time.

I offer these humble suggestions as a patriotic American who has lived in Beijing for 15 years -- and as a person who respects the Chinese people and what they are accomplishing.

Domestic politics should stop at the U.S. border. Trench warfare on China policy between the political parties and executive branch factions only plays into China's hands.

Stop preaching instant democracy. After the Tiananmen massacre, China's state media engendered a "nationalism of resentment." Aimed at cooling the ardor that young Chinese felt for America, the media portrayed the United States as having a secret agenda to keep China poor so that America can stay rich. A key part of this message is that America wants China to democratize because it will plunge the country into chaos. Those who survived the insanity of the Cultural Revolution see the point. Even Chinese people I know who are unhappy with their government believe that a nation with two millennia of top-down rule can only pluralize gradually. America can best help China inch toward political pluralism by trying to strengthen China's court system and rule of law and by making visas plentiful again for Chinese to attend our universities and public policy forums.

Let Chinese companies purchase or merge with U.S. companies unless the American company has genuine advanced military technology. We should also require reciprocity. Take the recent China National Offshore Oil Corporation Ltd. (CNOOC) bid to purchase Unocal Corp. Hysteria led to passage of a ridiculous House resolution by 398 to 15 expressing national security concerns about the deal, which involved a scant 0.8 percent of U.S. oil production. Instead, the United States should have responded as China would: Use the deal as leverage. America's politicians should have welcomed the CNOOC deal as long as China changed its own oil policies, which prevent foreign companies from operating gas stations in China, compel them to use Chinese companies when exploring for oil and almost always offer exploration leases for foreigners at the edges of promising fields to help China pinpoint the location of the biggest reservoirs for its own drillers.

Develop smart, workable rules on technology exports. Since the mid-1990s, China has been able to purchase almost any commercial technology it desires from Japan, Israel, Russia or the European Union. Bogged down in a bureaucratic quagmire of ever-changing rules and approval processes, U.S. machine tool makers and silicon chip equipment manufacturers have fallen behind. If this continues, we will endanger our own national security base by weakening our technology companies and their R&D capabilities. Nevertheless, many in Washington favor "catch-all control" regulations that could, for example, block a U.S. truck engine manufacturer from doing business with a Chinese firm that supplies some engines for Chinese army trucks. European and Japanese truck engine makers doubtless will be deeply grateful.

Vigorously push trade issues that provide a long-term win-win for China and its trading partners. Our focus should be intellectual property rights (IPR) protection. China's original modernization model was to invite foreign firms to manufacture for export in joint-ventures with Chinese companies. China was then supposed to learn to build its own companies and products. But many huge companies have been built through the wholesale theft of intellectual property and rampant copying of products. Within a three-block radius of my Beijing apartment, there are several dozen shops selling any Hollywood movie or American television series of note for $1 per DVD, copies of Prada and Louis Vuitton handbags for $10, nearly perfect copies of Callaway or Taylor Made golf clubs for $150, and fake North Face parkas for $35. Copied pharmaceuticals, car parts and the whole gamut of industrial products are plentiful across China. Worse, more and more such products are being exported. Chinese piracy is rapidly undermining political support for China in Congress and hampering the growth of its most innovative companies.

China knows the problem needs fixing but fears job losses and potential unrest in the towns and villages that host copycat factories. New U.S. Trade Representative Rob Portman could take a lesson from a predecessor, Charlene Barshefsky, who drafted a road map to guide China to WTO accession. As with WTO, China lacks the political will or consensus to come up with a plan on its own. The U.S. government should also back a new effort by the U.S. Chamber of Commerce and the American Chamber of Commerce in China to rate Chinese provinces and cities by their level of IPR enforcement. Public embarrassment and internal competition for foreign investment may prove to be stronger motivators than foreign complaints.

I understand America's genuine security concerns regarding China. But they should not be overblown to the point where they undermine our economic security. I also understand that reaching a political consensus isn't easy. But I am worried about the erosion of the sensible center. Chinese and U.S. politicians share the blame. As a global economic power, China can no longer employ IPR policies appropriate for a banana republic. And responsible members of Congress can no longer gin up China hysteria to get votes.

The stakes are getting too high.

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James McGregor is a journalist-turned-businessman and former chairman of the American Chamber of Commerce in China. His book "One Billion Customers: Lessons From the Front Lines of Doing Business in China" (Simon & Schuster/ The Wall Street Journal Books) will be published in October.

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